[Economy] Recommendations of Vijay Kelkar Committee on Fiscal Consolidation Roadmap

Vijay Kelkar recommendations

[Economy] Recommendations of Vijay Kelkar Committee on Fiscal Consolidation Roadmap

  1. Observations of Vijay Kelkar Committee
  2. How to increase collection of Direct Taxes?
    • Review DTC bill
    • Data Mining
    • PAN/UID Card Mandatory
    • Create Tax profiles
    • Charge interest rate on tax defaulters
  3. How to increase collection of Indirect Taxes?
    • Increase the coverage of service tax
    • Implement Goods and Services Tax (GST)
    • 6% Excise duty on Merit goods only
    • Difference: Custom and Excise duty?
    • What is Externality?
      • Negative externality
      • Positive externality
    • E-Governance in CBEC
  4. Disinvest from PSUs
  5. Dividend from PSUs
  6. How to Decrease Outgoing Money?
    • Reduce Subsidies
    • Change focus of Government schemes
  7. Mock questions for CSE, RBI Grade “B” etc.

Let us recap what we saw in previous episode starring Vijay Kelkar:

  1. Fiscal deficit =When outgoing money is more than incoming money, a pothole is created. This pothole is known as Fiscal deficit and it is not good for the economy.
  2. Fiscal consolidation = steps to be taken for preventing (or reducing) fiscal deficit pothole.

Now the moving on:

Vijay Kelkar Committee Observation

  1. High fiscal deficits tend to
    1. heighten inflation.
    2. reduce room for monetary policy stimulus (=steps taken by RBI to direct economy)
    3. dampen private investment, growth and employment.
    4. millions of young, both skilled and unskilled, enter the labour force each year, hence inflation and unemployment can be politically destabilizing for the Government.
  • If Government takes no step, then with a “do-nothing” approach, the fiscal deficit will be more than 6 per cent of GDP in the current year 2012-13, and such situation could lead the country to a 1991-like crisis.
  • Therefore, Fiscal consolidation is necessary.

So obviously, for “fiscal consolidation”, we’ll need to increase the incoming money and reduce the outgoing money. Now, let us check some of the important recommendations of this Kelkar Committee.

Vijay Kelkar recommendations

How to increase incoming money?

Increase Tax Collection

  • In 2007-08, the tax to GDP ratio was almost 12%
  • (but) in 2012-13 this ratio is estimated around 10%.
  • It means tax collection has fallen down.
  • Recall that fiscal deficit = Government’s incoming money is less than its outgoing money.
  • Thefore Government should take some measures to increase tax collection.

There are two types of taxes: Direct and Indirect. Kelkar has given recommendations to increase the collection of both Direct and indirect taxes, in following manner.
How to increase collection of Direct Taxes?
Review DTC bill

  • If Direct Taxes Code Bill, 2010 is implemented in its present form then there will be considerable tax losses to the Income Tax department.
  • Hence it (DTC bill) should be comprehensively reviewed.

Data Mining

  • Since 2004, the Income Tax Department has been electronically obtaining a large volume of information from third-parties through the Tax Information Network  (TIN).
  • This is done to check tax evasion and black money.
  • (but) there is a growing perception that the Income Tax Department is unable to harness this large volume of information, because it lacks data mining skills.
  • (Therefore) Taxpayers have found new methods and avenues for parking their undisclosed income to escape detection by Income Tax dept.
  • That’s why Income tax department should provide training in data-mining for all directly recruited inspectors and Assistant Commissioners, with the help of Big IT companies.

PAN/UID Card Mandatory

  • What is PAN, why is It used- all discussed in earlier articles. But still here is the brief recap:
  • PAN is an all India, unique ten-digit alphanumeric number.
  • PAN card is issued by the Income Tax Department. It does not change with changes in address or place.

PAN Card Sample with Obama

This an example but don’t be surprized, anyone can get PAN card. (=You don’t have to be Indian Citizen)

  • UID (Aadhar) is also similar- a unique 12 digit number, issued by Unique Identification Authority of India (UIDAI) to all the residents of India. Please note: there is difference between “resident” and “citizen”. Some people oppose Aadhar on this ground. (That illegal Bangladesis might also get it, if they’ve the proof of residence).
  • Please check this chart uploaded on official UID site. Extremely important for MCQs.

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